Unemployment has risen this year, and the government shutdown could exacerbate these rates. The social safety net is often inadequate in such circumstances, which leaves families to rely on their current wealth (PDF) to keep themselves afloat. Compounding these challenges to a family’s financial stability, the lack of a job restricts a person’s access to many sources of household credit. Combined, these dynamics put families under immense pressure.
Well-designed cash-value life insurance could help protect families in the event of job loss. The cash component of a life insurance product could help fill the gap caused by income loss or a family emergency. While most families do not have a cash value plan, among those that do, Black families are most likely to have a cash-value life insurance policy compared with other ethnic or racial groups. Given their historical financial vulnerability amid recessions, this tool could be a resource during future downturns. As the federal, state, and local policy environment rapidly evolves, the private sector can step in to improve access.
Cash-value life insurance provides a savings account that can be used during economic instability
The typical life insurance policy provides a payout to designated beneficiaries when the holder of the policy dies, known as a “death benefit.” However, specific life insurance products, known as cash-value life insurance, include a feature that allows the policyholder to build a savings account that can be accessed by them in the future or can be passed down to beneficiaries.
The life insurance premium—or payment to the life insurance provider required of the policyholder to maintain services—on cash-value life insurance is typically higher than on life insurance products, like term life insurance, that don’t have this cash component. However, the savings in the cash-value life insurance is invested in safe securities, such as US Department of the Treasury securities, to increase the value of the cash component and help families build their net worth (PDF). Unlike many loan products, the holder of the cash-value policy does not need a credit or employment check to access this cash. That said, withdrawing from the cash component will reduce the policy’s death benefit.
A popular alternative to cash-value life insurance is a lower-cost term life insurance policy, which provides the financial payout in the event of the policyholder’s death but without a cash component. Coupled with a diversified investment portfolio, term life insurance should provide a higher rate of return than that of a cash-value policy.
But cash-value life insurance offers some advantages. Although term life insurance provides a payout in the event of death, the death of the policyholder must occur within the “term” of the policy. For example, the “term” of term life insurance may be 30 years. If the policyholder passes outside of this period, the coverage amount is not paid to the policy’s beneficiaries. Although investment portfolios can deliver a higher return, the returns for most financial products are also subject to taxes. But in most circumstances, neither the returns delivered by cash-value life insurance nor accessing the cash component of cash-value life insurance incur taxes.
Black families are more financially vulnerable during a recession, largely because of their historical experience
A recession can be harder on Black families than white families. Historical evidence indicates that when the unemployment rate rises nationwide, it increases more for Black workers compared with white workers. In addition, Black families have a lower net worth and have less liquid wealth that can be accessed quickly and easily.
Both liquidity and insurance can help a family overcome an economic shock. Although the typical Black family has less liquid wealth, on average, Black families are more likely to have life insurance (PDF), including cash-value life insurance.
However, Black holders of cash-value life insurance policies are less likely to have built-up enough to overcome a typical emergency.
These racial differences are not isolated but are persistent and reflect specific experiences faced by Blacks families. For example, Black workers are historically more likely to be unemployed compared with white workers. Research indicates Black workers are often the first fired as the business cycle weakens, contributing to broader measures of Black workers’ unemployment. And these outcomes can be amplified by occupational segregation, or the unequal distribution of demographic groups across different occupations, which limits economic mobility and job security.
Ironically, the historical experiences that undermine the financial health of Black Americans are correlated with their higher rates of insurance policy ownership. Key reasons Black families disproportionately use life insurance include a lack of financial stability, a fear of not providing generational wealth (PDF), and intentions to cove burial costs and other “final expenses,” all while navigating long-standing discrimination in access to financial services and pathways to financial stability and economic mobility.
The private sector can help expand access to affordable cash-value life insurance and further protect families
Economic recessions can be painful experiences for many families. Among a number of counter-cyclical measures, public policy often helps families that have lost their job by providing access to unemployment insurance (UI). UI is a joint state-federal program that provides temporary financial assistance to workers who are unemployed through no fault of their own. However, UI may not last the duration of the person’s unemployment. And given inflationary concerns, an expansion in UI, particularly in ways that center the needs of Black workers, may be less likely.
As the social safety net provided by the federal government is reevaluated, which may also constrain state and local governments, private industry can help. Working together, the private sector can take several steps to help build resilience for workers and their families by supporting the growth of the cash-value component of life insurance or expanding its flexibility to address challenges faced by policyholders:
- The life insurance industry could work with employers to design a benefit option for their staff that includes the employers’ investment in cash-value life insurance policies. This could function as a matched investment similar to what many employers provide for their retirement accounts.
- Similarly, employers could provide an option to pay for or subsidize additional features to the life insurance policy, known as “riders.” For example, an employer could pay for a rider that automatically waives the policy’s premium in the event of unemployment. This would allow the policyholder to maintain access to their policy, including the built-up cash component, without requiring premium payments during job loss. Or it could pay for a long-term care rider that ensures costs of care when individuals need help with daily living activities like bathing, eating, or dressing.
Cash-value life insurance could provide a lifeline for some families experiencing economic distress. Each family’s financial situation differs, so understanding the trade-offs of accessing the cash component of a cash-value life insurance policy— including its implications for the coverage amount—is critical. Given the disproportionate ownership of cash-value life insurance policies among Black families and the shrinking safety net, it’s worthwhile for the private sector to explore its use amid this period of economic uncertainty.
Let’s build a future where everyone, everywhere has the opportunity and power to thrive
Urban is more determined than ever to partner with changemakers to unlock opportunities that give people across the country a fair shot at reaching their fullest potential. Invest in Urban to power this type of work.
